The Road to Homeownership: Know Before You Apply!

Buying a home is one of the best investments you will make in your life, but it can also be one of the most stressful. The three steps you should take – saving, credit score (as discussed in previous issues of Living Out), and examining your budget – before actually applying for the loan can be some of the most crucial. Here are a few points to keep in mind before applying.

Step One: Saving

The first step to homeownership should ideally begin well before you purchase a home – saving. There are several things you may want to save for, including:

The Down Payment: Homebuyers were once required to put down at least 20% of the purchase price to get a mortgage. Today, you may be able to buy a home with as little as 0-5% percent down. Keep in mind that if it is less than 20%, you may be required to purchase private mortgage insurance or get a second mortgage with a higher interest rate.

Closing Costs: Closing costs are the fees required to obtain a mortgage and transfer ownership of the home, such as attorney costs, an appraisal, and title insurance. You may have to pay the fees yourself, but sometimes the seller will pay them or you can have them financed (included in the mortgage).

Post Purchase Reserve Funds: You may need to show the lender that you will have savings left over after you purchase the home. At least three months’ worth of mortgage payments is a good amount to have in reserve.

Step Two: Credit Score

In order to get a mortgage, especially one with a low interest rate, you usually need to have a good credit score. Scores range from 300-850 – the higher, the better. Your score is calculated using data from your credit report. Many lenders require a score of at least 680 to get a mortgage. Those with a score in the mid-700s or higher usually get the best interest rates.

If your score is below the 680 mark, don’t despair. Here are some things you can do to improve your score:
• From this point forward, always make your payments on time.
• Pay down your debt. Keep balances under 40% of the credit limit. Pay off if possible.
• If you already have 2-4 accounts open, avoid opening further accounts.
• Keep older accounts active.
• Avoid excessive credit applications.

Step Three: Examine Your Budget

If the lender approves you for a $350,000 mortgage, that means you can afford a $350,000 mortgage, right? Not necessarily.

Lenders typically take many factors into consideration; however, you may have more expenses than your debt. While your income and expenses can change after the home purchase, creating a budget gives you a better idea of what you can afford to spend than just basing it on a pre-approval amount. Don’t forget that you will have to pay property taxes and homeowners insurance.